Cryptocurrencies

A Bird With Clipped Wings: Pre-IDOs & The Illiquidity Problem

As many from the global blockchain-cryptocurrency community would agree, the steady rise of Decentralized Exchanges (DEXs) is a welcome sign. Interacting with a decentralized network through a centralized exchange is, after all, essentially defeating the former’s purpose. Furthermore, DEXs bring to the table several practical benefits for crypto-based projects, especially concerning bootstrapping liquidity.

No matter how innovative the idea behind a business venture, one needs funds to establish and further develop. Therefore, in turn, there’s the need for reliable fundraising methods; naturally, in this regard, decentralized projects demand decentralized means. In the past, this led to ICOs, but we all know that panned out. Today, driven by the evolution of DEXs, we have a promising alternative—Initial DEX Offering (IDO).

DEXs have overcome their initial liquidity crisis and are now enabling IDOs to make an indelible mark in the domain of fundraising. In the recent past, there has been a flurry of successful IDOs. Yet, despite that, there’s a glitch; IDOs are doing great, but pre-IDOs fall short of the mark. Project owners are ultimately facing the brunt, as their fundraisings suffer like a bird with clipped wings, unable to take full flight. 

The problem of illiquidity is still haunting innovators but now in the pre-IDO phase of their bootstrapping endeavors. The general issue is that the current liquidity market is highly imbalanced. On the one hand, pre-IDO tokens are wholly illiquid. On the other, assets with high potential for liquidity—such as NFTs—mainly serve as mere collectibles, lying idle in users’ wallets.

We must look deeper into the problem, but we can almost sense the solution already—leveraging NFTs for pre-IDO liquidity. Apart from mitigating a persistent crisis, this will unlock billions of dollars that hitherto remained underutilized.

The Diagnosis of Pre-IDOs

Projects face a severe dilemma in the pre-IDO phase of their fundraising journey. To ensure longevity and robustness, they must adopt token vesting—locking tokens for a predefined time and releasing them gradually. As such, this is unavoidable: one, this displays the team’s commitment, and two, it restricts manipulations in the token’s price. 

Vesting also assures investors that the project is not a pump-and-dump scheme and that its developers are committed to long-term goals. At the same time, though, vested tokens are illiquid; they can neither be traded nor collateralized. The negative outcome of locking tokens is that a substantial share of value remains out of the market’s reach. Naturally, investors are less willing to buy into pre-IDO tokens; innovators, in turn, are stuck in a vicious cycle of illiquidity. 

The liquidity crisis facing pre-IDO tokens is also because of the lack of appropriate marketplaces for this phase. Consequently, projects have to rely upon OTC platforms that are often shady, putting themselves and their potential investors at risk. Inconsistent trading practices, limited scope for early token price discovery, and stunted community participation plague pre-IDOs on such platforms. In combination, these factors further restrict the possibility of generating liquidity before the intended IDO. 

A Tale of Untapped Liquidity

Imagine someone dying for the need of potable water. When this is a reality, is it not injustice to underuse or misuse available water resources? The scenario with liquidity is somewhat similar—while some are suffering from an illiquidity crisis, liquidity lies underutilized elsewhere. 

Over the past year, Non-Fungible Tokens or NFTs have experienced a phenomenal evolution, rising from nothing to almost everything. As we have seen, this novel asset type has immense potential for on-chain representation of other assets. Furthermore, by being unique and non-interchangeable, NFTs can have tremendous value in themselves. 

Considering recent developments, it’s not an overstatement to say that NFTs are revolutionizing digital creations, liberating creators, and upholding intellectual property rights. Artists like Beeple, among many others, are selling their work for millions of dollars, which is very promising. Parallelly, there’s been consistent growth along the flanks of NFT’s primary use case, that is, crypto-based collectibles. We know how Ethereum crashed when CryptoKitties’ popularity sky-rocketed; that’s only one instance. CryptoPunks have gone from $1 to $7.5 million in the past four years in terms of market value.

Despite steady gains in value, though, we are falling short of leveraging NFTs fully in terms of liquidity. As collectibles, NFTs are mostly showpieces; they may append the owner’s sense of worth, but they aren’t achieving much beyond that. Moreover, by definition, non-fungible assets are not compatible with fractional trading, diminishing their usability further. In this manner, a rapidly-increasing repository of value lay untapped in the depths of an abyss. One can see it but not touch; that is highly frustrating.

Channelizing Liquidity to Pre-IDOs

There are illiquid pre-IDO tokens at one end of the tunnel; at the other, there are NFTs with a high potential for deep liquidity. As innovators, our purpose can be to remove the barriers that separate them and make the two ends meet. The technology to enable this harmony is available in bits and pieces; vision is needed the most. 

Token Wrapping is a potent way of joining the dots when it comes to value. It enables one asset to inherit or represent another’s value without compromising on decentralization or robustness. By the same logic, assets can seamlessly leverage each other’s liquidity which is, after all, the requirement in our present context. For clarity, consider how currencies based on the Gold Standard inherit the value of gold while making it liquid. It is possible to do something similar with pre-IDO tokens, but of course, this will be much better, given the underlying framework.

To address the liquidity crunch of vested pre-IDO tokens, we can represent them as NFTs. In turn, we shall trade such NFTs in the secondary market, thereby infusing liquidity to the former. The benefits run both ways, as NFTs also gain from the diversification of their possible use cases. Not just collectibles or artwork, they can now represent an entire multiverse of projects and propositions. Based on this method, a comprehensive marketplace will also be able to mitigate the concerns related to unsolicited OTC platforms.

To conclude on a positive note, it’s worth considering that the solutions mentioned above are very much feasible. Innovators have, in fact, already embarked on this path.In the coming days, others will surely follow suit, and that too, with enhancements. In a domain as dynamic as the blockchain-cryptocurrency community, the future is always the present. It is only a matter of time before the IDO bird takes full flight, soaring high on a clear blue sky.

Author Bio: 

Garlam Won has been in the crypto ecosystem since 2017, and previously headed Marketing at Harmony before starting his venture - Momentum 6. He has been behind the marketing of some of the top DeFi & NFT projects in the space including the likes of Harmony, Sandbox, Kava, SEASCAPE, MANTRADAO, KPAD, Splyt, etc. 

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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